- California’s Office of Tax Appeals (“OTA”) determined that asset sales of twenty-five separate dental practices did not qualify as occasional sales exempt from sales tax.
- Multiple transactions in a short time frame do not qualify for California’s restrictive occasional sale exemption.
Background
The California OTA recently denied a taxpayer’s appeal to abate the imposition of sales tax on its sale of the assets of twenty-five separate California-based dental practices. In Appeal of Coast Dental Services, Inc., the taxpayer executed twenty-five separate asset purchase agreements as seller with fifteen separate buyers over the course of approximately three and a half months in 2018. The taxpayer appealed a decision by the California Department of Tax and Fee Administration (“CDTFA”) denying its petition for a redetermination on the sales tax due.
Taxpayer’s Sales Tax Audit
The taxpayer held a seller’s permit issued by CDTFA, as it sold electronic toothbrushes and other taxable items in the regular course of business to patients. During CDTFA ‘s audit, it reviewed the twenty-five asset purchase agreements whereby taxpayer sold the practices to the various buyers, and it noted that these assets were not held or used in the regular course of the taxpayer’s trade or business for which taxpayer’s seller’s permit was required.
The Occasional Sale Rule and its Application to the Sales Transactions
California’s sales tax is imposed on a seller’s retail sales of tangible personal property measured by gross receipts, unless the sale qualifies for an exemption or is excluded by statute. Cal. Rev. and Tax Code § 6012, 6051. The law presumes that all sales are subject to tax unless evidence to the contrary is established. California, like most states, strictly construes an interpretation of a granted exemption narrowly when a controversy arises.
By regulation, sales of businesses for which a seller’s permit is required incur sales tax on the sale of the items held or used by the business in the course of the activities that required the holding of the seller’s permit. Cal. Code Regs., tit. 18, §1595(b)(1). In the taxpayer’s case, those items were toothbrushes and the like sold to patients. Occasional sales are exempt from sales tax. “Occasional sales” apply to sales of tangible personal property not held or used by a seller in the course of activities for which a seller’s permit would be required, unless the sales occur frequently enough such that the seller would be required to hold a seller’s permit. Cal. Rev. and Tax Code § 6006.5. A seller who makes three or more sales for substantial amounts (over $400) over a twelve-month period is required to hold a seller’s permit, even if the sales are for resale. Cal. Code Regs., tit. 18, §1595(a)(1).
The OTA opinion quotes from the applicable regulation, which contains an example as to how a taxpayer, engaging in what it deems to be atypical, exempt transactions can nonetheless incur sales tax. “[T]he operator of [a] service enterprise makes more than two sales of substantial amounts of [TPP] used in the service enterprise [within a twelve-month period], the first two sales are exempt occasional sales, but the operator is required to hold a [seller’s] permit for the third and subsequent [sales for the same] 12 month period.”
CDFTA agreed that the sale of the fixed assets here were not held or used in the course of activities for which the taxpayer held a seller’s permit. Therefore, it argued that the first two asset sales during the three-and-a-half-month period were exempt, but the subsequent sales did not meet the occasional sales definition and were therefore subject to sales tax.
The taxpayer argued that the size of the dental practices was such that it was impractical to sell to a single buyer, but that its sale constituted a concerted effort that should be considered as one transaction. The OTA acknowledged that in certain instances, multiple contracts can be viewed as a single sale for sales tax purposes. It considered this a question of contract law to be determined by the parties’ intent under the objective language of the contracts. It noted that such factors as interdependence of the contracts – or if the contracts were contingent on one another – would be indicia of such intent. It noted that while the taxpayer might have intended for these sales to be viewed as one transaction, the intent of the counterparties was also relevant. Since the contracts did not show interdependence or a common purpose among all the parties, its intent argument did not hold up, and that the taxpayer presented no evidence to meet this requirement beyond its own assertion that it was intended to be considered one transaction. The OTA, therefore, found in favor of the CDFTA and against the taxpayer in assessing applicable sales tax on the final twenty-three of the twenty-five transactions over the three-and-a-half-month period, resulting in slightly less than $1,000,000 of additional sales tax due, plus interest.
Forvis Mazars Insight: Transfer taxes in mergers and acquisitions are often an afterthought to the transaction, perhaps because it is assumed that some sort of exemption will apply to the sale, or because the allocation of proceeds to the assets sold are largely to intangibles. This case shows the danger in that approach and the importance of understanding the sales and other transfer tax implications of the contemplated asset sale. Understanding the transfer tax implications well in advance of the deal can help with pricing the assets and understanding the negotiation around transfer tax provisions in the purchase agreement as well.
How Forvis Mazars Can Help
We can help you understand the transfer tax implications of a proposed transaction and plan for the tax implications of the assets transferred in the context of a merger or acquisition, whether you are buying or selling assets.